A shop in Rio de Janeiro. A sea change is rippling through Latin America, a region once better known for hyper-inflation, political instability and high poverty rates. In the past decade, 50 million people have joined the middle class, a World Bank study showed last month. (SERGIO MORAES/REUTERS)

A shop in Rio de Janeiro. A sea change is rippling through Latin America, a region once better known for hyper-inflation, political instability and high poverty rates. In the past decade, 50 million people have joined the middle class, a World Bank study showed last month.(SERGIO MORAES/REUTERS)

If there is one word that signifies the march of millions of Brazilians out of poverty and into the middle class, it is this: perfume.

Brazil is now the world’s largest fragrance market, and third in the $300-billion-plus global beauty market. Its consumer class, the biggest in the continent, also has a voracious appetite for cellphones, flat-screen TVs and tablet computers.

Market View

It’s not just Brazil. A sea change is rippling through Latin America, a region once better known for hyper-inflation, political instability and high poverty rates. In the past decade, 50 million people have joined the middle class, a World Bank study showed last month. The massive shift means the middle class and the poor now account for about the same share of region’s population, at about 30 per cent.

With rising fortunes come shifts in consumption patterns, from needs to wants, from low-priced goods to middle and high-end products such as fridges and cars. It explains why companies are so keen on the region, where Dorel Industries is selling more car seats, Lush Fresh Handmade Cosmetics more soap, Research In Motion more BlackBerrys and Bank of Nova Scotia more mortgages. It’s also where Canada’s biggest public pension manager is pouring investments – into Brazilian shopping malls and Chilean toll roads – a long-term bet this trend will only gather steam.

Lush, which makes fragrant $9 bars of soap and $5 bath bombs, has opened stores in Mexico, Panama and Chile in the past three years. It now has its sights set on Brazil, where it plans to open a manufacturing plant and retail outlets in the Sao Paulo area within the next year or so.

“There’s a growing middle class, with growing buying power … and there’s a lovely desire to trade up and try new things,” says Karl Bygrave, director of Lush Ltd., which is based in the U.K. but has a Canadian CEO and makes all of its North American products in Canada.

A string of factors explains the shift, from calmer inflation to more stable, democratic governments and strong economic growth that has come alongside targeted social policies to support the poor. The World Bank also cites higher levels of education among workers, growing employment in the formal sector, more women in the work force and smaller families.

Scotiabank is boosting its bets on the shift. Its Mexican unit closed a deal to buy Credito Familiar this week – a purchase that gives the bank 145,000 customers who are just entering the work force and buying their first television or car.

The acquisition “is designed to help us gather and get into what is now the pre-stage to the emerging middle class,” says Troy Wright, president and chief executive officer of Grupo Financiero Scotiabank Mexico, who is based in Mexico City.

About one in five bank mortgages in Mexico are taken out through Scotiabank, the Canadian bank with the largest presence in Latin America. Its latest purchase aims at serving lower-income clients, on the cusp of moving up the ladder. It estimates 10 to 15 per cent of these customers will graduate per year into its regular bank services – buying houses and appliances – as their income levels rise.

That’s not to gloss over risks in the region, from Brazil’s recent economic slowdown (which grew just 0.6 per cent in the third quarter ) to Mexico’s drug-related violence and concern over a default in Argentina. Risks remain, but for a growing number of companies, the rewards are greater.

Pension funds are making long-term bets on Latin America’s potential. The CPP Investment Board said last month it is spending $343-million to expand its portfolio in Brazil’s real-estate market. Its holdings now include interests in 56 retail, office and logistics properties – including four shopping malls.

The country’s appeal stems from both economic and political factors. The first “is related to emerging middle class. Brazil has a tremendously young population and that young population is growing at the same time as the middle class is growing. So you’re getting a convergence of a very high rate of strong consumers,” which in turn boosts economic growth, said Peter Ballon, CPPIB’s head of real estate investments for the Americas.

At the same time, the country is enjoying far greater political stability. “Brazil has had a turbulent past, and what we’ve seen over time, it’s a very strong stable democracy,” with smooth transitions between governments, tamer inflation and clearer separation between the government and judicial system.

Dorel Industries Inc. is also targeting countries like Chile as a top source of growth, where it’s selling more car seats and strollers. In September, the Montreal-based firm bought a 70-per-cent stake in two businesses that sell playpens, strollers and high chairs to customers in Colombia and Central America.

Latin America, in the juvenile market, “is the main focus for growth right now and probably for the next years,” said Jeffrey Schwartz, chief financial officer. “We believe, we can grow there faster and more profitably than in anywhere in the world right now. It’s a bold statement, but it’s true.”

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